A recap of Moore v. US and its potential impacts on the nation's tax system

On December 5, the U.S. Supreme Court heard arguments for Moore v. U.S. At issue in Moore, is the constitutionality of taxes imposed on the undistributed past and current earnings and profits of a controlled foreign corporation, or CFC. The impact of the Supreme Court’s impending decision on the case could have far-reaching ramifications.

Background

A CFC is a foreign corporation in which U.S. shareholders own a threshold percent of the outstanding stock or total combined voting power. The taxes on CFCs were enacted under the 2017 Tax Cuts and Jobs Act, TCJA, through the expansion of the definition of subpart F income to include current CFC income and the creation of a one-time Mandatory Repatriation Tax, MRT, on past CFC income. Prior to the TCJA, there were no U.S. laws allowing the federal government to tax CFC income which remained outside the U.S. For such income to be taxed, it had to come into the United States in some capacity, such as through a distribution to a U.S. shareholder.

Moore v. U.S.

The appellants, Charles and Kathleen Moore, became minority shareholders of a CFC in 2005.  The CFC retained and reinvested all of its earnings and profits from 2006 through 2017.  As a result, no distributions were made to the Moores during this time, and the Moores did not pay any U.S. tax on the company’s earnings and profits.  However, following the enactment of the TCJA, the Moores amended their 2017 tax return to include the MRT, resulting in an additional $15,130 tax liability.  The Moores challenged the imposition of this tax, bringing a suit in U.S. District Court to recover the amount paid.  Following unfavorable decisions in the District Court and Court of Appeals, the Moores appealed to the U.S. Supreme Court.

The Moores argue that the MRT is unconstitutional because it violates Article I, Section 9, Clause 4, known as the Apportionment Clause, of the U.S. Constitution, which states that no direct tax can be levied unless in proportion to the census.  The Sixteenth Amendment removes the apportionment requirement for the levy and collection of income taxes; however, the Moores assert that the Sixteenth Amendment does not apply because unrealized earnings do not constitute income.  In the alternative, the Moores argue that the MRT applies retroactively in violation of the Fifth Amendment’s Due Process Clause, which provides that, as applied to the federal government, no one shall be “deprived of life, liberty or property without due process of law.”

The government contends that the MRT is, in fact, an income tax and notes that the understanding of the Sixteenth Amendment at the time of adoption was that income taxes were to be levied on income generally, rather than to only realized or distributed income.  The government alternatively argues that the MRT is constitutional because it is an excise tax. 

Potential Impact

Aside from the technical legal issues at play, both parties, and supporters of each, are concerned as to the potential widespread ramifications of the decision.

The Moores’ concern is that in declaring the MRT constitutional, it green lights Congress to circumvent the Apportionment Clause whenever they wish by simply defining certain funds as income. Supporters of the Moores, such as the Atlantic Legal Foundation, further believe that upholding the MRT would pave the way for a wealth tax, which could impact everything from retirement accounts to international corporations.

The District Court, which sided with the government, stressed that declaring the MRT unconstitutional opens the door to the constitutionality of other taxes being called into question. In its amicus brief, the American Tax Policy Institute echoed the District Court’s position, stating that declaring the MRT unconstitutional would be “profoundly destabilizing” to the U.S. tax system, as it would cause the constitutionality of other provisions of the TCJA, and other types of tax, to be called into question.

Given the potential impacts of the case, taxpayers and tax professionals alike are eager to hear how the Supreme Court will ultimately rule. A decision in this case is expected by June 2024.